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What should be done to raise productivity growth and allow catching up in living standards?
There is indeed considerable scope to accelerate the convergence process through raising productivity, and current policy strategies recognise this. The economy’s trade specialisation has typically been in low-skill labour-intensive sectors, in which it faces rising competition from some of the new EU members, where wages are lower and whose labour forces are generally higher-skilled, and from other low-wage countries outside the OECD. The Portuguese productive sector is responding to the shift in relative prices, and to enjoy durably stronger growth, Portugal needs to continue to move away from traditional labour-intensive low value-added products. The most promising strategy to address the catching-up challenge is to:
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raise the skills of the Portuguese work force, to accelerate the shift towards higher value- added and more competitive products;
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ease restrictive employment protection legislation for established workers, which creates labour market segmentation, hinders mobility and restrains technological and managerial innovation;
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intensify the use of Information and Communication Technology;
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raise public awareness of the advantages of competition, building on the new Competition Law and Authority;
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create an environment where the private sector invests and innovates, and where firms are encouraged to expand if they are successful.
Government programmes to address these issues are at various stages of development. The key is to carry through and deepen these reform programmes and ensure effective implementation.
Trend Productivity growth
Output per hour worked in the business sector (1)
Percentage changes
1. Adjusted for the business cycle using a Hodrick-Prescott filter with lambda 100.
Source: OECD.
Are insufficiencies in the education and training systems being appropriately addressed?
Despite a big improvement in the past decade, Portugal still ranks close to the bottom of the OECD in terms of educational attainment of the population and student performance. Value for money in the schooling system is poor, as evidenced by the combination of below-average student performance with a close to average level of spending per student. The acquisition of higher skills, in school or on the job, would make the labour force more adaptable; it would also foster the use of new technologies and innovation in production processes and management. More educated workers would be able to move to higher productivity jobs or to positions where their productivity can grow more rapidly over time.
Aware of the urgent need to further raise the quality of education services, reforms have been undertaken: i) measures have been launched at all levels of formal schooling, modernising the curricula and introducing flexibility, although the Framework Law setting the principles for the reform of compulsory schooling was still being legislated in mid-2004; ii) a new focus is put on professional schooling and technical education; iii) changes are being made to the operating and financing of tertiary education; iv) rationalisation of the network of schools has started with the regrouping of very small schools. The strategy to push forward the transformation of Portugal into a knowledge-based economy and to improve the cost-effectiveness of the education system seems broadly adequate. Measures starting to be implemented, such as systematic evaluations of schools and teachers and allowing universities to set their fees and recruitment requirements more freely, are promising. Educational reforms will be more effective when the Framework Law for compulsory education is approved and implemented throughout the education system.
Revamping of vocational training and life-long learning is envisaged. Some of the framework conditions are being developed, such as the national certification system and evaluation tools. But plans to make recurrent education effective and promote lifelong learning are at a more preliminary stage. Ongoing discussions with social partners are promising. They should lead to policy measures; thereafter, swift implementation and close monitoring of results will be key, given the importance of upskilling the existing workforce.
How well does the labour market perform?
Portugal’s labour market performs rather well, coping with structural changes without a durable increase in the unemployment rate, while employment rates are higher than the European average, especially for groups typically under-represented in the labour force. This has been achieved through flexible real wage adjustment and the expansion of atypical contracts. Even so, labour mobility is low, in a context of rather restrictive employment protection legislation (EPL). The labour market is segmented: established workers who enjoy a high level of protection coexist with self employed and workers on fixed-term contracts, and informality is pervasive in certain activities. The reform of the labour legislation, which has been applied since the end of 2003, should make the labour market more responsive to both cyclical and structural forces: i) it should enhance the responsiveness of wage settlements to productivity and skill differentials across economic sectors; ii) it extends the possibility of using fixed-term contracts under certain conditions; and iii) it allows better control of absenteeism and fraudulent claims to sick leave. However, the reform does not fully address the need to ease general job protection legislation. This aspect should be put back on the reform agenda, as it would help to strike a better balance between job security and increased labour mobility. It would also facilitate hiring under permanent contracts and be conducive to higher productivity growth.
Is the business environment innovative, friendly and competitive?
Despite progress made in ICT access and use, Portugal is not keeping up with the rapid development of the Information Society in many other OECD countries. To some extent, measures such as upgrading human skills in the Portuguese working-age population at large and facilitating workers’ mobility in the job market, will contribute to closing the gap. Complementary actions are probably still needed. Among these, a key element would be to reduce users’ costs in the telecommunication market, by enhancing competition there. Efforts to modernise management and train entrepreneurs would also contribute.
Portugal’s investment rate is relatively high, reflecting large inflows of EU structural funds and FDI over many years. There is a very dynamic private sector which operates in an open and competitive environment. The cost of doing business, reflecting administrative procedures, licensing, lack of transparency and predictability of tax and other regulatory obligations, was often perceived as being high (as illustrated by various indicators developed at the OECD). Administrative procedures for creating new businesses have been streamlined. However, the complexity of business taxation and regulation continue to limit private investment, inhibit entry of new firms, discourage existing profitable firms from expanding and permit unprofitable firms to survive through recourse to informal activities and non-compliance with tax obligations and regulations. Measures were introduced, starting in 2002, as part of the broad-based “Productivity and Growth Programme” to improve the business climate. In particular:
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Tax and administrative simplification is continuing, which is appropriate.
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A new incentive regime was launched in mid-2003 to foster capital formation, including through targeted tax breaks.
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The reform of the Bankruptcy Law, which was urgently needed, has been approved and should now be speedily be implemented. The antiquated legal system acted as a deterrent to adequate restructuring of businesses in trouble.
The government’s strategic intervention to foster investment includes commendable initiatives, for instance integrating all administrative procedures in a single agency and encouraging venture capital. However, the government should also take steps to further reduce the number of administrative procedures, and refrain from distorting market forces through tax incentives and subsidies. Helping a sector or a firm would set an unhelpful precedent and it would run against efforts made over past years to improve the allocation of resources by ensuring a level-playing field.
Portugal has made key advances in 2003 to promote competition, with the creation of an independent and financially autonomous Competition Authority and the approval of a new Competition Law. However, effective competition is still low in certain sectors, particularly in the network industries where prices for specific services or consumers remain relatively high.
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While furthering the process of privatization, the state should be careful to refrain from past practices, such as retaining special voting rights in companies operating in “strategic sectors”, which risks distorting or discouraging private investment to the detriment of consumers and the efficiency of the economy.
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The creation of the Iberian Electricity Market (MIBEL), still to be implemented, is expected to improve capacity and efficiency of the electricity sector. In preparation, Portugal has further opened its retail market for electricity. Competition issues are being examined in the European Commission to ensure that the structure of the new market be conducive to effective competition and secure reliable supply of electricity at low prices for Portuguese industry and households over the medium to long term.
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The lack of competition and concomitant high prices in some fixed telecommunication services, where the incumbent retains market power, continues to require forceful action from the Competition Authority and the sector’s regulator, in tandem.
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The full edition of the OECD Economic Survey for Portugal is available from:
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SourceOECD for subscribing institutions and many libraries
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Government officials with OLISnet accounts
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Return to the OECD Economic Survey - Portugal 2004 homepage
A printer-friendly Policy Brief (pdf format) may also be downloaded. The Policy Brief contains the OECD assessment and recommendations, but does not include all of the charts available from the above pages
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